چکیده انگلیسی

This article proposes a theory of banking of emission permits under conditions of regulatory uncertainty. Based on a two-period partial equilibrium framework, we examine the effects of increasing risk–in the sense of a mean preserving spread–regarding a future permit allocation at the firm level. We also examine the role of an agency to pool risks by re-allocating permits for a group of firms. Our results are twofold. First, an increase in risk may lead to changes in a firm’s banking strategy, depending on the third partial derivative of its production function with respect to pollution. Second, we define an optimal risk-sharing rule between agents to respond to political decision changes. Our results overall suggest that the bankability of permits may be used as a risk-management tool.

مقدمه انگلیسی

Emission permits are now widely considered as efficient instruments for regulating firms’ emissions of pollutants. Their numerous advantages have been extensively discussed in the literature (Bohm and Russel, 1985, Pearce and Turner, 1990, Cropper and Oates, 1992, Koutstaal, 1997 and Baumol and Oates, 1998). However, emission permits may also convey a high level of uncertainty with respect to political decisions. Indeed, for emission permits, uncertainty depends not only on their price but also on the allocation rules enforced by the regulator.
Hence, the informational efficiency argument1 in favor of emission permits compared to other classic instruments2 vanishes given this potential higher level of uncertainty linked to the risk of political decision changes.3 To cope with these political uncertainties, a number of firms may not participate in the permit market, and express their fear of an environmental regulation system dependent on such shifts in the regulatory environment (Wossink and Gardebroek, 2006).
Hahn (1989) first stressed the potential negative effects of political uncertainties for emission permit systems. He emphasized that the advantages of permit schemes in terms of emission control may be undermined by political uncertainties regarding banking and trading provisions. Leston (1992), Stavins (1995) and Ben-David et al. (1999) have also underlined that the performance of emission permits is critically linked to the clarity of political decisions.
In this article, we only examine firms’ production decisions subject to the introduction of an emission permit market, and to the possibility to bank permits forward in a partial equilibrium framework. At the beginning of each period, firms receive an initial permit allocation. Without uncertainty on the next period allocation, firms smooth their emissions between trading periods as documented in previous literature (Rubin, 1996, Kling and Rubin, 1997 and Leiby and Rubin, 2001). This banking behavior also changes the temporal pattern of emissions by decreasing the concentration of emissions on early periods.4 Since it overcomes potential negative effects, the authorization of banking therefore appears as a decisive feature for the successful implementation of permit systems as an environmental regulation tool. Departing from this benchmark case, the introduction of uncertainty on future allocation provides further incentives for firms to bank permits, and to consider collusion as a way of insurance (Von der Fehr, 1993 and Ehrhart et al., 2008).5
This article therefore addresses the following central questions: Will an increase in the level of uncertainty concerning future allocation impact positively or negatively the amount of banking by firms? Following a variation in the level of uncertainty, is it possible to identify an optimal risk-sharing rule between firms? We aim at detailing firms’ behavior, that is why we focus our analysis on the banking provisions, and consider that permit trading between firms has already occurred.
Compared to the previous literature, the main theoretical results of this article are twofold. First, we show that when firms face an increase in the level of risk, the variation of the amount of banked permits is linked to the third derivative of their production function with respect to emissions. Second, without uncertainty on the total number of permits allocated during the second period, an agency may introduce a Pareto-optimal permit re-allocation between firms. When the regulatory uncertainty concerns the number of permits available during the second period, an optimal risk-sharing rule needs to take into account the sensitivity of firms’ marginal productivity to the number of permits, as well as the elasticity of the marginal productivity with respect to the stock of pollution. These results convey interesting policy implications concerning the use of banking as a risk-management tool linked to political uncertainty on an emission permit market. These results also underline the need to take into account the sensitivity of investors with regard to pollution choices (Etner and Jouvet, 2000).
The remainder of the article is organized as follows. Section 2 provides stylized facts about emission trading. Section 3 details the behavior of firms. Section 4 examines risk-management strategies between firms and proposes an optimal risk-sharing rule. Section 5 discusses the relevance of these theoretical results to the policy debate. Section 6 concludes.

نتیجه گیری انگلیسی

This article shows that, once permit trading between firms has occurred, political uncertainty about allocation rules may provide incentives for firms to bank permits. Indeed, firms’ banking behavior appears linked to their technological characteristics, and more precisely to the third derivative of their production function with respect to emissions. Thus, when facing a stronger (weaker) increase of their marginal productivity, firms tend to use less (more) permits, and thus are able to produce and bank more (less) permits. Besides, we have characterized an optimal risk-sharing rule, whereby an agency is able to pool permits between firms. When uncertainty is associated with permit allocation during the second period, this rule depends on the sensitivity of firms’ marginal productivity to the number of permits, and on the elasticity of the marginal productivity with respect to the stock of pollution.
From a regulatory viewpoint, managing the environment through tradable permit markets implies that firms have the ability to bank permits in order to hedge against the risks of political decision changes. The use of banking is not motivated here by adaptation concerns to environmental constraints, but by the need to counter-balance political risks. Our analysis has therefore confirmed the key role played by banking provisions in order to cope with the potential political uncertainty related to the creation of emission permit markets.